In a pre-election move mimicking his Western counterparts, President Boris Yeltsin recently signed a decree purporting to support Russia's small firms. Nobody knows exact numbers, but Russia's small business sector appears to be growing. Significant problems remain for grass-roots entrepreneurs, but these are often at the federal, rather than the local level. From the federal government, Russia's small firms don't want gimmicks and promises, but a simplified tax system and low inflation. Noises from Moscow about "investment credits" and "technical support" are no help at all.
The number of small firms in Russia -- those with less than 100 workers -- rose from 250,000 in 1991 to 900,000 by the end of last year. Most of the growth in small firm numbers was concentrated in the early '90s -- by 1993, the number had reached 860,000. This suggests that in the last two years, small entrepreneurs have stagnated. But employment data challenges this view: In fact, there has recently been a surge in worker numbers at small firms. In 1994, 6.8 million people worked in firms of less than 100. By the end of 1995, this figure was 8.8 million, a rise of 29 percent.
While employment in medium and large firms in the construction, transport, retailing and catering sectors fell considerably last year, employment at small firms in all these sectors grew sharply. This represents a movement of skilled dynamic workers away from low-paying jobs in state and former state enterprises and into more lucrative private sector positions.
The image of grass-roots entrepreneurial activity is reinforced by the fact that most of Russia's small firms are very small. This trend is well illustrated by the construction sector, which accounts for one in 10 small firms. Although construction also accounts for the largest share of employment in small firms -- 28 percent -- small construction firms on average employ only 23 workers. Similarly, small firms in the industrial sector -- traditionally one of monolithic factories -- are also surprisingly small: The average small industrial firm employs only 20 workers.
In fact, half of all Russia's small firms employ 15 people or less and another 32 percent have between 16 and 50 employees. A slew of these "micro-firms" deal in trade, catering and social services. In fact, the smallest firms of all are the catering firms, employing an average of 6.5 employees.
When asked why unemployment in Russia is relatively low, most experts reply that traditional industrial firms have not yet engaged in a serious "labor shake-out," and are keeping workers under-employed. Wise Western officials have used such arguments to argue that Russia has not yet grasped the "industrial restructuring" nettle.
But this explanation is now out of date. In 1993, managers in medium and large enterprises reported that a mere 17 percent of all workers who left the firm did so voluntarily. In 1995, the proportion of "voluntary quits" reported by the same managers had ballooned to 67 percent. Many of these workers took the initiative to leave the protective shell of their old firms because they had found new work and new hope in small -- often very small -- enterprises.
Last year represented the government's most serious attempt to achieve macroeconomic stabilization. It was the year expenditures -- particularly subsidies to enterprises -- were cut deeply. Russia's medium and large enterprises have shed a great deal of labor. But the process has been more of a "labor walk-out" than a "labor shake-out." The reason unemployment did not accelerate seriously during last year's considerable fiscal squeeze was that the small-firm sector took up a good deal of the slack.
Although Russia's small-scale firms are very much alive, they are not yet thriving. Even after last year's employment surge, they still employ only 10 percent of the workforce -- compared with 28 percent in Britain and 53 percent in Japan. Small firms accounted for one-third of last year's output in trade and catering, but only 9 percent of output overall. It is certainly true that numerous small concerns operate undetected in the informal economy, but Russia's small-scale entrepreneurs still face more serious obstacles than their capitalist brethren in Central and Eastern Europe.
Surveys of small-scale entrepreneurs suggest the most serious obstacle by far to the development of their firms is Russia's taxation system. It will come as no surprise that no less than 66 percent ranked it among their top two headaches. And the problem next on the list -- cited by 40 percent -- was high inflation. But small entrepreneurs are a reassuringly independent bunch. Only 19 percent complained about the lack of state financial support and only 12 percent clamored for "tax privileges."
Yeltsin's decree promises 500 million rubles (about $100,000) in federal investment credits and $200 million in guarantees to foreign companies opening credit lines to small businesses. The federal fund for small businesses is also set to receive 5 percent of this year's privatization revenue. It is reassuring that the executive understands that small firms are employment intensive and often play host to genuine technical innovation. President Yeltsin goes as far as to label them "morally right." But sound-bites do not amount to a serious small-firms policy.
Apart from a reasonable macroeconomic and taxation environment, international evidence suggests small firms need help obtaining finance from the commercial sector. Banks everywhere dislike lending to small firms with no credit history and few fixed assets. Small firms which do receive loans have to pay extortionate rates of interest.
The day may soon come when Russia's banks do actually lend. But this will not help small firms in their quest for venture capital. The government, however, should -- but only indirectly. Several countries have large lending institutions that buy funds wholesale, as it were, lending them to small firms at a cost only marginally above base interest rates. The German government -- via Marshall aid -- provided the cash to set up such an institution 45 years ago. Since then, it has not paid out another pfennig, and many of Germany's best small firms have blossomed into world-class industrial concerns.
The number of small firms in Russia -- those with less than 100 workers -- rose from 250,000 in 1991 to 900,000 by the end of last year. Most of the growth in small firm numbers was concentrated in the early '90s -- by 1993, the number had reached 860,000. This suggests that in the last two years, small entrepreneurs have stagnated. But employment data challenges this view: In fact, there has recently been a surge in worker numbers at small firms. In 1994, 6.8 million people worked in firms of less than 100. By the end of 1995, this figure was 8.8 million, a rise of 29 percent.
While employment in medium and large firms in the construction, transport, retailing and catering sectors fell considerably last year, employment at small firms in all these sectors grew sharply. This represents a movement of skilled dynamic workers away from low-paying jobs in state and former state enterprises and into more lucrative private sector positions.
The image of grass-roots entrepreneurial activity is reinforced by the fact that most of Russia's small firms are very small. This trend is well illustrated by the construction sector, which accounts for one in 10 small firms. Although construction also accounts for the largest share of employment in small firms -- 28 percent -- small construction firms on average employ only 23 workers. Similarly, small firms in the industrial sector -- traditionally one of monolithic factories -- are also surprisingly small: The average small industrial firm employs only 20 workers.
In fact, half of all Russia's small firms employ 15 people or less and another 32 percent have between 16 and 50 employees. A slew of these "micro-firms" deal in trade, catering and social services. In fact, the smallest firms of all are the catering firms, employing an average of 6.5 employees.
When asked why unemployment in Russia is relatively low, most experts reply that traditional industrial firms have not yet engaged in a serious "labor shake-out," and are keeping workers under-employed. Wise Western officials have used such arguments to argue that Russia has not yet grasped the "industrial restructuring" nettle.
But this explanation is now out of date. In 1993, managers in medium and large enterprises reported that a mere 17 percent of all workers who left the firm did so voluntarily. In 1995, the proportion of "voluntary quits" reported by the same managers had ballooned to 67 percent. Many of these workers took the initiative to leave the protective shell of their old firms because they had found new work and new hope in small -- often very small -- enterprises.
Last year represented the government's most serious attempt to achieve macroeconomic stabilization. It was the year expenditures -- particularly subsidies to enterprises -- were cut deeply. Russia's medium and large enterprises have shed a great deal of labor. But the process has been more of a "labor walk-out" than a "labor shake-out." The reason unemployment did not accelerate seriously during last year's considerable fiscal squeeze was that the small-firm sector took up a good deal of the slack.
Although Russia's small-scale firms are very much alive, they are not yet thriving. Even after last year's employment surge, they still employ only 10 percent of the workforce -- compared with 28 percent in Britain and 53 percent in Japan. Small firms accounted for one-third of last year's output in trade and catering, but only 9 percent of output overall. It is certainly true that numerous small concerns operate undetected in the informal economy, but Russia's small-scale entrepreneurs still face more serious obstacles than their capitalist brethren in Central and Eastern Europe.
Surveys of small-scale entrepreneurs suggest the most serious obstacle by far to the development of their firms is Russia's taxation system. It will come as no surprise that no less than 66 percent ranked it among their top two headaches. And the problem next on the list -- cited by 40 percent -- was high inflation. But small entrepreneurs are a reassuringly independent bunch. Only 19 percent complained about the lack of state financial support and only 12 percent clamored for "tax privileges."
Yeltsin's decree promises 500 million rubles (about $100,000) in federal investment credits and $200 million in guarantees to foreign companies opening credit lines to small businesses. The federal fund for small businesses is also set to receive 5 percent of this year's privatization revenue. It is reassuring that the executive understands that small firms are employment intensive and often play host to genuine technical innovation. President Yeltsin goes as far as to label them "morally right." But sound-bites do not amount to a serious small-firms policy.
Apart from a reasonable macroeconomic and taxation environment, international evidence suggests small firms need help obtaining finance from the commercial sector. Banks everywhere dislike lending to small firms with no credit history and few fixed assets. Small firms which do receive loans have to pay extortionate rates of interest.
The day may soon come when Russia's banks do actually lend. But this will not help small firms in their quest for venture capital. The government, however, should -- but only indirectly. Several countries have large lending institutions that buy funds wholesale, as it were, lending them to small firms at a cost only marginally above base interest rates. The German government -- via Marshall aid -- provided the cash to set up such an institution 45 years ago. Since then, it has not paid out another pfennig, and many of Germany's best small firms have blossomed into world-class industrial concerns.
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